Oil falls 2% as Greece default prospects rise

Chance that Fed will avoid another big stimulus plan also weighs

By

LauraMandaro

SAN FRANCISCO (MarketWatch) — Oil futures sank more than 2% Monday, marking their lowest close in three weeks, on worries Greece could soon default, further undercutting economic growth and global oil demand.

Oil for October delivery
CL1V
closed down $2.26, or 2.6%, at $85.70 a barrel on the New York Mercantile Exchange, the lowest close for the benchmark since Aug. 26 and its worst drop since Sept. 2. Last week oil gained 0.8%.

Oil futures had traded lower, but in a range between $86 and $87.75, in Asian and European trading as investors reacted to reports euro-zone finance ministers meeting late last week delayed a decision to release Greece’s next round of aid as Athens came under pressure to enact more austerity measures. Greece is likely to run out of cash within weeks without the aid.

A emergency teleconference between Greece and creditors including the International Monetary Fund on Monday ended without a statement of action. Greece’s finance ministry said the conference call will be repeated Tuesday at the same time. Read more on Greece.

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“It’s really a follow through of some disappointing meetings in Europe. Leaders can’t get into any kind of agreement to come to a solution about the debt crisis,” said Mike Zarembski, senior commodities analyst at OptionsXpress. “We’re seeing the usual flight to quality — the dollar higher, the Treasury market higher. It’s a risk-off day,” he said.

Oil made another leg down as U.S. stocks tumbled from the start. On halt to halt five straight sessions of gains, the Dow Jones Industrial Average
DJIA, +0.12%
spent much of the session down 200 points and recently traded off 187 points, or 1.6%, at 11,322. Read more in Market Snapshot.

For oil, U.S. stocks have recently been acting as a barometer of investors’ perception of global economic growth. And on days when it’s seemed likely some European countries will default on their debt, oil has moved in tandem with equities.

Natural gas for October delivery
NG11V
reversed up 2 cents, or 0.5%, at $3.83 per million British thermal units.

Some resolution to the Greek debt situation — even in the form of a default — could help break oil out of its recent range, said analysts.

“Once that gets out of the way, it could clear the air, we could see a bit of recovery,” said Zarembski.

While Greece concerns were depressing oil prices Monday, “I think this concern is overblown — it will not have the impact on the U.S. economy that it will have on Europe. It is the European banks that have most of the Greek debt,” Charles Perry, chief executive officer at energy-consulting firm Perry Management.

OPEC cuts coming

In oil news, the secretary general of the Organization of the Petroleum Exporting Countries said Gulf oil producers are expected to cut their output once Libya resumes production. Read more on OPEC output expectations.

Secretary General Abdalla Salem el-Badri, a Libyan, told a forum in Dubai that Libya could reach pre-unrest production levels within 15 months, as few key facilities were damaged, reported Zawya Dow Jones. Saudi Arabia had led a group of Gulf producers in increasing output this summer on forecasts for higher demand.

Jason Schenker, a commodities analyst and president of market research firm Prestige Economics LLC, said the OPEC comments were not having much impact on the day’s trading because the production moves were likely several months in the future “and they’re also saying something reasonable we’d already expect.”

Instead, oil traders are likely more focused on the risk the Federal Reserve may avoid offering another big liquidity boost — known as quantitative easing — when it concludes its two-day Federal Open Market Committee meeting Wednesday. Read more on what the Fed is expected to say Wednesday.

“If the Fed does not take meaningful action on Wednesday, it increases the risk probability we slide again into recession,” Schenker said. “Risk is asymmetrically to the downside for industrial commodities.”

Also, the U.S. Energy Information Administration said world energy consumption should grow 53% by 2035, led by demand growth in India and China. Read more on EIA's demand outlook.

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